Woe to the stinters, who when they measure against the people, take full measure, but when they measure for them or weigh for them, do skimp. Quran 83:1.

Overview of Pakistan's Economy

By Pakistan Ministry of Finance

Riding on the strong economic fundamentals of last year Pakistan's
economy has gathered greater momentum during the fiscal year 2003-04. Acceleration
in growth accompanied by a sharp pick up in industrial production, a strong
upsurge in investment, and a further strengthening of the external balance of
payments have been the hallmarks of this year's performance. The pre-payment
of high cost external debt, the strategic re-entry into the international capital
markets through the floatation of a Eurobond and the re-basing of Pakistan's
national accounts have been the other stellar occurrences of the fiscal year
2003-04. No efforts to revive the economy will be complete unless these macroeconomic
gains are transferred to the masses in terms of an improved standard of living.
The efforts of the last five years have started yielding positive results and
this year has seen the incidence of poverty declining, enrolment in primary,
middle and matric levels rising, and various quality of life indicators improving.

During this fiscal year, Pakistan succeeded in attaining; a higher than targeted
growth in real GDP, powered by stellar growth in large-scale manufacturing and
a continuing robust performance in services; a double-digit growth in per capita
income, reaching $ 652; a strong rebound in investment, particularly in private
sector investment owing to a rare confluence of various positive developments
on the economic scene; low inflation and an investment-friendly interest rate
environment; an unprecedented increase in credit to the private sector; sharp
increases in the consumption of electricity and gas reflecting rising levels
of economic activity; a reduction in the fiscal deficit; on target tax collection;
a buoyant stock market with an all-time high aggregate market capitalization;
a double-digit growth in exports and imports; workers' remittances maintaining
their momentum with the current account balance remaining in surplus for the
third year in a row; a continued accumulation of foreign exchange reserves and
stability in the exchange rate; a sharp decline in the public and external debt
burden; a lowering of the interest cost through the pre-payment of $ 1.17 billion
of high cost external debt; and a successful return to the international capital
markets through the floatation of a Eurobond.

From the grassroots perspective, the incidence of poverty has declined by 4.2
percentage points over 2001 figures. Other social indicators such as enrolment
in primary, middle and matric levels; access to sanitation, safe drinking water,
housing, electricity and gas have all showed marked improvements. Two successive
years of strong growth along with over Rs.860 billion of cumulative spending
over the last five years on social sector and poverty related programs is now
beginning to bear fruit. Notwithstanding these improvements, much remains to
be done, and this is that critical juncture in time when maintaining momentum
through policy stability is paramount. While socio-economic and macroeconomic
policies pursued during the year have had a strong influence on this across-the-board
improvement, an increasingly broad and dynamic global recovery with industrial
production and global trade picking up sharply, have aided Pakistan in this
endeavor.

International Environment: Unlike in the past two to three years, this
year has seen a relatively benign global economic environment after almost three
years of weak and fragile growth in the world economy. A strong rebound in world
trade, a robust recovery in the United States and emerging Asia, especially
China, and the strongest showing for the Japanese economy since 1996 are offering
grounds for optimism for the global economy in general and developing countries
in particular. This optimism has encouraged the staff of the International Monetary
Fund (IMF) to raise its forecast for global growth by about 0.5 percentage points
to 4.6 percent in 2004 and 4.4 percent in 2005. Notwithstanding a strong and
broad-based recovery in the major growth poles of the world economy, the Euro
area is still exhibiting anemic growth of 1.7 percent for 2004. The United States
has led the way with growth of 4.6 percent in 2004, supported by a resurgent
Japan, with 3.4 percent. The growth momentum is exceptionally strong in emerging
Asia where the Chinese economy is leading the way and is projected to grow by
8.5 percent in 2004. More robust income growth in the advanced economies is
expected to stimulate activity in developing countries through trade, mainly
in the form of higher export volumes. Developing countries including Pakistan
have suffered from the slowdown in world trade in 2002, chiefly because of weak
demand in the advanced economies. The pickup in global activity that began in
2003 and intensified in 2004 should translate into stronger and more sustained
export growth for developing countries and this could be further augmented if
progress is made in reducing trade barriers as envisaged in the Doha Round.

Notwithstanding a strong and broad-based recovery in the world economy there
remain risks to the short-term outlook which will have a direct bearing on developing
economies, including Pakistan. Oil prices have increased substantially from
$ 26.5 per barrel in September 2003 to almost $ 42 per barrel on June 1, 2004.
According to one estimate, a $ 5.0 per barrel increase in oil prices over the
baseline price persisting for one full year will reduce global growth by 0.3
percent with an attendant impact on developing countries. Furthermore, the extra-ordinary
rise in the price of oil fuels headline inflation which can have severe monetary
policy implications. The stronger-than-expected global economic recovery, the
depreciation of the US dollar against other major currencies, relatively low
inventories, OPEC announcements of prospective production cuts, the 'fear factor'
surrounding a possible disruption of supplies from the Middle East and some
speculative activity have been mainly responsible for this unprecedented surge
in oil prices. Without a stable and low oil price outlook, this global recovery
seems tenuous at best.

GDP Growth: Real GDP growth, once again, surpassed the target (5.3 %)
with a headline number of 6.4 percent during 2003-04 compared to last year's
5.1 percent rate. This buoyant growth was aided by a 13.1 percent and 5.2 percent
growth in the manufacturing and services sectors, respectively. The performance
of agriculture fell short of the target by growing at 2.6 percent against a
target of 4.2 percent and last year's achievement of 4.1 percent. When compared
with other developing countries in general and East and Southeast Asian countries
in particular, Pakistan's growth performance has been quite impressive. Developing
nations grew, on average, by 6.1 percent while East and Southeast Asian countries
like Hong Kong, Singapore, Korea, Indonesia, Malaysia, Philippines, Bangladesh
and Sri Lanka registered growth rates ranging from 1.1 percent to 5.5 percent
in 2003-04. Few countries in the region, namely China, India and Thailand grew
faster than Pakistan during this period. Fiscal stimulus in the shape of large
public sector spending and a conducive interest rate environment provided important
support to this growth picture in Pakistan.

Agriculture: The slippage in agriculture was mainly attributable to the
weak performance of both the major and minor crops. Major crops, accounting
for 34 percent of agricultural value added, grew by 2.8 percent against an impressive
recovery of 6.9 percent last year. The performance of two major crops, cotton
and wheat, was lackluster as the cotton crop suffered from pest problems in
Southern Punjab while wheat production was adversely affected by the lack of
rain in March when the formation of wheat grain takes place. The size of the
cotton crop is estimated at 10.0 million bales - 1.6 percent lower than last
year while that of wheat is estimated at 19.767 million tons against a target
of 20.0 million tons, a shortfall of 1.2 percent. The performance of rice and
sugarcane - the other two major crops - has been modest at best with the rice
crop estimated at 4.848 million tons - 8.3 percent higher than last year and
sugarcane at 53.419 million tons - 2.6 percent higher than last year. These
two crops are highly water intensive and the improved availability of water
helped increase their production. Minor crops, accounting for 12 percent in
agricultural value added showed a 'weak' performance, growing by only 1.7 percent.
Widespread rains during the monsoon season of 2003 (July-September) and increased
snow fall in the catchment areas contributed to an improvement in the water
situation during the year. The canal head withdrawals in the Kharif 2003 and
Rabi 2003-04 seasons were higher by 5.0 percent and 26.2 percent, respectively
over the previous year. However, during winter (January-March 2004) the actual
rainfall was 40 percent lower than normal and this had a severe impact on the
wheat crop.

Manufacturing: One of the most important developments of the year has
been the sharp acceleration in manufacturing growth. Overall manufacturing grew
by 13.4 percent in 2003-04 against a target of 7.8 percent and last year's 6.9
percent. This impressive growth was underpinned by the highest ever growth recorded
in large-scale manufacturing which accounts for 68 percent of overall manufacturing,
and exhibited broad-based growth of 17.1 percent against a target of 8.8 percent
and last year's 7.2 percent. Improvements in the macroeconomic environment,
a decline in the cost of capital, the availability of consumer financing at
affordable rates, strong growth in exports and a general feel good mood in the
economy have been responsible for this unprecedented growth in large-scale manufacturing.
Over the last four years, the large-scale manufacturing sector has grown at
an average rate of almost 10 percent per annum thereby increasing its share
in GDP from 9.6 percent to 11.8 percent. Major industries that registered double-digit
growth include: sugar, cement, cooking oil, jeeps and cars, motorcycles, motor
tyres etc.
Construction: Another star performer has been the construction sector registering
a growth rate of 7.9 percent against a target of 5.4 percent and last year's
growth of 3.1 percent. Housing and construction has been identified as one of
the major drivers of growth and the government has taken various budgetary and
non-budgetary measures to boost this sector which has responded positively despite
higher input prices. Another star performer has been the electricity and gas
distribution sector which registered a massive increase of 22.5 percent in 2003-04
against a decline of 2.6 percent last year.

Per Capita Income: The sharp rise in per capita income which was witnessed
last year continued during 2003-04, albeit at a relatively slower pace owing
to a decline in net factor income from abroad (mainly workers' remittances).
The per capita income in dollar terms increased by 12.0 percent from $ 582 last
year to $ 652 during the outgoing fiscal year. Last year per capita income in
dollars grew by 15.7 percent on the back of a massive increase in net factor
income from abroad resulting in a two year per capita income average growth
rate of 13.9 percent per annum.

Investment: Total investment rose to 18.1 percent of GDP in 2003-04
against 16.7 percent last year. Most importantly, fixed investment rose sharply
to 16.4 percent of GDP against 14.8 percent last year. What is highly encouraging
is the significant rise in private sector investment -from 11.2 percent to 11.7
percent of GDP. This year's growth is overwhelmed by massive investment in large-scale
manufacturing by the private sector which grew by 25.4 percent during the year.
Two inter-related sectors, construction and ownership of dwellings grew by impressive
rates of 23.5 percent and 25 percent respectively, implying heavy investment
in the housing and construction sector. National savings as a percentage of
GDP remained at around 20 percent on account of a significant improvement in
the current account balance. It is noteworthy that the national savings rate
has increased by 8.3 percentage points since 1998-99.

Inflation: Tame inflation has also been one of the hallmarks of this
government's macroeconomic policies. The rate of inflation as measured by changes
in the Consumer Price Index (CPI) averaged 3.9 percent during the first ten
months of the current fiscal year against 3.3 percent in the same period last
year. Food and non-food inflation averaged 4.9 percent and 3.1 percent respectively
as against 3.1 percent and 3.4 percent during the same period last year. Much
of the surge in food inflation over last year has been due to both demand and
supply factors resulting in an increase in the prices of wheat, wheat flour,
rice, meat, edible oil and onions. The government has taken various measures
to improve the supply situation of wheat including the import of 1.0 million
tons of wheat with a concurrent wheat export ban. Central Banks around the world
tend to focus on core inflation, which excludes the impact of food and energy
prices. Core inflation basically represents policy (fiscal, monetary, exchange
rate) induced inflation. Core inflation remained quite subdued owing to prudent
macroeconomic policies pursued during the year and averaged 3.3 percent against
the headline (overall inflation) number of 3.9 percent for the ten months of
the current fiscal year.

Monetary Policy: The State Bank of Pakistan (SBP) continued with an
easy monetary policy stance during the current fiscal year with a view to reinforcing
the growth momentum that had picked up last year. Accordingly, the interest
rate environment not only remained investor-friendly but middle class borrowers
also benefited from such environment. The monetary expansion target was set
to the tune of Rs.230 billion or 11.1 percent higher than last year. The monetary
expansion during the first nine months (July- March) of the current fiscal year
amounted to almost Rs.255 billion (higher by 12.3%) compared with an expansion
of Rs.211 billion (higher by 12 %) in the same period last year. In other words
the monetary expansion target was overtaken in the first nine months of the
fiscal year. Unlike the previous two years, when the bulk of the monetary expansion
resulted from a strong build up in the net foreign assets of the banking system,
this year saw an unprecedented increase in private sector credit amounting to
Rs.245 billion against an increase of Rs.107 billion during the same period
last year. This also reflects a renewed private sector confidence in the basic
macroeconomic fundamentals of the country. Almost 52 percent of the credit to
the private sector went to manufacturing (Rs.126.4 billion). The benefits of
the low interest rate environment also filtered down to middle class consumers
as evidenced by the substantial increase in personnel loans amounting to Rs.50
billion during July-March 2003-04.

Government borrowing for budgetary support amounted to Rs.54 billion against
a borrowing target of Rs.15 billion for the whole year. Three factors are responsible
for the higher than targeted borrowing for budgetary support by the government.
Firstly, the government had to borrow heavily from the banking system to finance
the pre-payment of $ 1.17 billion of high cost external debt to the Asian Development
Bank (ADB). Secondly, lower than projected external receipts for the budget
and finally, lower investment in the national saving schemes. The accumulation
of net foreign assets of the banking system remained subdued at Rs.50.4 billion
compared to an accumulation of Rs.257 billion in the same period last year.
On the whole, broad money supply grew by 12.3 percent against a target of 11.1
percent. It is expected that the current fiscal year may likely end with monetary
expansion of around 15 percent. Two successive years of higher than targeted
monetary expansion may give rise to inflationary pressure. However, the Central
Bank is closely watching the inflationary situation.

As a result of the easy monetary policy stance, the weighted average lending
rate declined by 289 basis points - from 7.58 percent in June 2003 to 4.69 percent
in March 2004. The weighted average deposit rate also declined, though at a
much slower pace, that is, from 1.9 percent to 1.3 percent during the same period
- a decline of only 60 basis points. During this period the efficiency of the
banking system also improved significantly with the spread between the lending
and deposit rates declining from 568 basis points to 339 basis points - an efficiency
gain of 229 basis points. The yield on 6 - month treasury bills remained stable
at 1.6 percent during the year. It would not be out of place to mention here
that the easy monetary policy stance perused by the Central Bank over the last
three years has succeeded in lowering the entire term structure of interest
rates. The weighted average lending rate declined from 13.74 percent in June
2001 to 4.69 percent in March 2004 - a decline of 905 basis points in less than
three years. Similarly the yield of 6 - month Treasury Bills, which was as high
as 12.88 percent in June 2001, declined to 1.68 percent in March 2004 - a decline
of 1120 basis points during the same period. The export refinance rate, which
is linked to the 6 - month Treasury rate, declined from 11.1 percent in July
2001 to 1.5 percent at the end March 2004, a hefty decline of 960 basis points
which has helped improve the external competitiveness of the Pakistani exporter.

Stock Market: Another landmark achievement of the outgoing fiscal year
has been the impressive growth in the share index of the Karachi Stock Exchange
(KSE) - rising from 3403 points on June 30, 2003 to 5430 points on April 30,
2004 - an increase of 2027 points or 59.6 percent during the period. The aggregate
market capitalization also increased by 92.4 percent, from Rs.746.4 billion
to Rs.1436 billion during the period under review. In terms of US dollars the
market capitalization of the KSE surged to $ 25 billion from $ 12.92 billion
during the period under review. A number of factors have contributed to the
persistence of the bullish trend in the stock market which include: a continuation
of pro-growth economic policies; a stable macroeconomic environment; an acceleration
in economic growth; a stable exchange rate; a brisk pace of privatization through
the capital markets; a visible improvement in the Pakistan - India relationship;
the availability of adequate liquidity in the market; good operating and financial
results from the majority of blue chip companies and appropriate reforms initiated
by the Securities and Exchange Commission of Pakistan (SECP).

Fiscal Policy: Prudent fiscal management is the foundation of a stable
macroeconomic environment. Weak fiscal balance has been the major source of
macroeconomic difficulties in the not too distant past. After almost five years
of extensive efforts through the reform of the tax system and tax administration
Pakistan has succeeded in attaining fiscal stability. The overall fiscal deficit
that averaged nearly 7.0 percent of the GDP in the 1990s has declined to 3.3
percent in the outgoing fiscal year. The revenue deficit has been narrowed from
3.0 percent of GDP in the late 1990s to 0.2 percent and the primary balance
has remained in surplus for the last many years. Public debt as percentage of
GDP has also declined sharply and is now moving towards a sustainable level.

Pakistan has made considerable gain on fiscal side during 2003-04. The overall
fiscal deficit declined from 3.7 percent of GDP in 2002-03 to 3.3 percent in
2003-04. The Central Board of Revenue (CBR) is targeted to collect Rs.510 billion
- 10.5 percent higher than last year. The overall tax revenue is targeted to
increase by 8.1 percent while on the expenditure side, total expenditure is
estimated to rise by 6.6 percent but most of the increase is coming from the
Public Sector Development Program (PSDP) - up by 17.6 percent. Current expenditure
remains at last year's level with almost no growth. Interest payments and defense
spending used to be the two largest items of overall expenditure followed by
PSDP. As a result of prudent fiscal management, the share of interest payment
in total outlay has declined sharply from 29.7 percent in 2001-02 to 21.1 percent
in 2003-04. The share of defense in total outlay has remained stagnant at around
18.0 percent but that of PSDP, increased from 15.3 percent to 15.9 percent over
the same period. As a percentage of GDP, interest payments have been declining
while defense spending remained stagnant at 3.3 percent.

Another development on the fiscal side has been the near elimination of the
revenue deficit in 2003-04. Over the last two years the revenue deficit has
declined from Rs.76 billion (or 1.3% of GDP) to Rs.13.3 billion (or 0.2% of
GDP). As per the Fiscal Responsibility Law the elimination of the revenue deficit
was targeted to be achieved by 2007-08. However, Pakistan has almost reached
the target four years in advance. Similarly, Pakistan has maintained a surplus
in the primary balance over the last several years.

As a result of considerable improvement in fiscal balance, the public debt situation
has improved immensely in recent years. Not only has the pace of accumulation
been slowed but the burden of public debt has declined as well. During the outgoing
fiscal year, public debt grew by only 2.8 percent. As percentage of GDP, public
debt has declined from 75.2 percent last year to 69.7 percent in 2003-04 - a
sharp decline of 5.0 percentage points in one year is a major achievement. Since
public debt is a charge on the budget therefore its burden must be viewed in
relation to government revenue. Public debt was 503.7 percent of total revenue
last year; it has now declined to 487.7 percent in the current fiscal year.

Pakistan has made considerable gains toward fiscal consolidation. The overall
fiscal deficit has been narrowed, the revenue deficit has nearly been eliminated
and a primary surplus has been maintained for some time. Resultantly, public
debt is fast moving towards a sustainable level. Even in countries with better
fiscal management, maintaining and building on progress will be a continuing
challenge. What is required is a prolonged commitment to fiscal discipline,
which will come through a rule-based fiscal policy. Pakistan has already drafted
a rule-based fiscal policy, enshrined in the Fiscal Responsibility and Debt
Limitation Law, which has been approved by the Cabinet and has been sent to
the Parliament for legislation.

Balance of Payments: Pakistan's external balance of payments gained further
strength during the year under review. Both exports and imports registered robust
growth; healthy increases in foreign exchange reserves continued despite heavy
pre-payment of external debt; and the current account balance continued to remain
in surplus for the third year in a row. A strong and broad-based recovery in
the global economy also helped firm-up demand for Pakistani exportable goods.
The inflow of workers' remittances continued its rising momentum, albeit at
a slower pace; the exchange rate remained stable; and a substantial increase
in FDI was recorded.

Exports: Exports grew by 13.1 percent during July-April 2003-04
against a hefty increase of 20.8 percent during the same period last year. When
viewed against the backdrop of stellar growth (20.8%) last year, a higher double-digit
growth rate in exports is one of the major achievements of the outgoing fiscal
year. Given the performance of the first 10 months of the current fiscal year
exports are likely to cross the target of $ 12.1 billion for the whole year.
The higher unit values of exports, deeper penetration into the European and
US markets, a sharp decline in the Export Refinance rate, and a competitive
exchange rate have contributed to the surge in exports during the year. The
surge in exports is underpinned by a strong growth in textile manufacturers
and 'others' exports Textile manufacturers, accounting for 65.4 percent of total
exports, registered an increase of 14.3 percent while 'other' exports covering
9.2 percent of total exports, grew by a hefty 48.6 percent. Almost 71 percent
of the contribution to overall export growth came from textile manufactures
and 26 percent came from 'other' exports. Primary commodities exports registered
a decline of 1.5 percent mainly on account of very little export of wheat this
year. Excluding the exports of wheat, primary commodities exports show an impressive
growth of 12.8 percent. It is also encouraging to see the exports of engineering
goods picking up at a much sharper pace. This year, exports of engineering goods
grew by 33.4 percent - rising from $ 55.1 million to $ 73.5 million.

Imports: Imports grew by 19.0 percent during the first ten months
(July - April) of the current fiscal year against a hefty increase of 22.5 percent
in the same period last year. Most importantly, non-food non-oil imports are
up by almost 32 percent against 23.5 percent last year. The exceptionally strong
growth in non-food non-oil imports is one of the leading indicators of a surge
in domestic economic activity. The salient features of this year's performance
of imports include: impressive growth in the import of the machinery, chemical,
metal and textile groups. The petroleum group registered a decline of 7.7 percent
on account of 27.4 percent decline in the imports of petroleum products. In
quantity terms, the import of petroleum products was down by 42.2 percent on
account of a continuing surge in POL output by local refineries, an increased
use of gas in industries and electricity generation, and lesser reliance on
fuel oil-based thermal electricity owing to higher electricity generation through
hydel. The major contributors to this year's rise in imports are the machinery
group (27.1 %), followed by the agricultural / chemical group (22%), and metal
group (7.0 %). The share of oil bills remained unchanged at 26.6 percent since
last year. However, if the unprecedented rise in oil prices persists then given
the rising level of economic activity Pakistan's oil bill is likely to cross
$ 3.0 billion in 2004-05. If extrapolated for the remaining two months of the
year, total imports may likely be in the neighbourhood of $ 14.5 billion for
the whole fiscal year. As a result of the developments in exports and imports,
the trade gap has widened from $ 1251.5 million to $ 2011.4 million during the
first 10 months of the current fiscal year, showing a deterioration of 60.7
percent. Given the stronger than anticipated surge in domestic economic activity,
the widening of the trade gap in the short-run is quite normal. The year is
expected to close at a trade deficit of around $ 2.5 billion against the yearly
target of $ 0.7 billion.

Remittances: The inflow of workers' remittances continued to maintain
its momentum, albeit at a slower pace during the current fiscal year. However,
when viewed against the yearly target of $3.6 billion, the performance has been
impressive. The last fiscal year was an extra-ordinary year for the inflow of
workers' remittances at $ 4.23 billion. Realizing the fact that a one-time adjustment
has taken place, the current year target was set at $ 3.6 billion or $ 300 million
per month. During the first ten months (July-April) of the current fiscal year,
the flow of remittances was $ 3.21 billion or $ 321 million per month against
$ 3.53 billion in the same period last year. Two points need to be noted as
far as the inflow of remittances is concerned. First, as stated above, a one-time
adjustment took place last year which is not expected to be repeated this year.
Accordingly, against the actual receipt of $ 4.23 billion last year the target
for the current year was set at $ 3.6 billion. Given the average monthly trend
of inflows, the year is going to end with remittances of $ 3.8 billion. Second,
last year's remittances also included $ 126 million which came through the Hajj
Sponsorship Scheme. With the continuing build up in foreign exchange reserves
the government decided not to launch the said Scheme this year. To that extent,
the flow of remittances was expected to be less compared with last year. The
United States remained the single largest source of cash remittances accounting
for 31.5 percent, followed by the UAE with 15.8 percent and Saudi Arabia with
a 14.8 percent share.

Current Account Balance: Sustaining a current account surplus for the
third year in a row has been another major achievement for the outgoing fiscal
year. The current account balance, excluding official transfers, remained in
surplus at $ 1369 million (1.4% of GDP) during July-March 2003-04. However,
the surplus was $ 2706 million during the same period last year. The contraction
in the magnitude of the surplus was the outcome of higher deficits in the trade
and services accounts as well as lower inflow of workers' remittances. Given
the rising levels of domestic economic activity and the persistence of higher
oil prices in international markets, imports are likely to grow at a higher
pace, leading to a further widening of the trade balance. As a consequence,
Pakistan may face difficulties in sustaining the surplus in the current account
in the next fiscal year.

FDI: Pakistan has succeeded in attracting $ 760 million in foreign direct
investment (FDI) during July-April 2003-04 against $ 696 million in the same
period last year, thereby registering an increase of 9.3 percent. By the end
of the current fiscal year, FDI is expected to cross $ 1.0 billion on account
of the issuance of two cellular licenses amounting to $ 291 million each, the
half proceeds of which are expected to be received before the end of the fiscal
year. The bulk of the FDI has come in the oil and gas, transport and communication,
and banking sectors. These three areas have accounted for 71 percent of the
FDI this year. Almost 85 percent of the FDI has come from Switzerland, the United
States, the United Kingdom, the UAE and Saudi Arabia.

Privatization: The privatization program has progressed at a much faster
pace this year. By end-March 2004, Pakistan had completed or approved 139 transactions
with gross proceeds of Rs.134 billion. Of this, a sum of Rs.33.1 billion was
received during the first nine months (July-March) of the current fiscal year.
A new feature of the privatization program has been the offering of shares to
the general public through the stock market, which was well received. For example,
in the case of OGDCL, 97,000 applicants purchased shares whose subsequent value
increased by over Rs.8 billion. The response in the SSGC offering has been even
greater with over a quarter million small applicants receiving shares through
a transparent balloting process.

Foreign Exchange Reserves: Pakistan's foreign exchange reserves continued
to rise despite the pre-payment of $ 1.17 billion of high cost external debt.
By end-April 2004, foreign exchange reserves stood at $ 12.5 billion, sufficient
to provide cover for almost one year of imports. In other words, Pakistan added
$ 1.8 billion to its reserves during July-April 2003-04. The continued build
up in foreign exchange reserves has provided strength to the Pakistani rupee
viz, the US dollar. The inter-bank exchange rate per US dollar averaged Rs.57.46
in April 2004 as against Rs.57.74 in July 2003, showing a nominal appreciation
of 0.5 percent. In general, Pakistan's exchange rate viz the US dollar has remained
stable during the period under review.

External Debt: Until a few years ago Pakistan was facing serious difficulties
in meeting its external debt obligations. Not only was the stock of external
debt and foreign exchange liabilities growing at a breakneck pace but the debt
carrying capacity remained stagnant. Consequently, the debt burden (external
debt and foreign exchange liabilities as a percentage of foreign exchange earnings)
reached an unsustainable level of 335.4 percent by 1998-99. Following a credible
strategy of debt reduction, Pakistan has not only succeeded in reducing the
stock of external debt and liabilities but at the same time built-up a substantial
stock of foreign exchange reserves. The stock of external debt and liabilities
were as high as $ 37.9 billion at the end of the 1990s but had been brought
down to $35.8 billion by end March 2004 - a decline of over $ 2 billion. The
surplus in the current account coupled with a continued build-up in foreign
exchange reserves and higher foreign exchange earnings and the prepayment of
expensive debt are the major factors responsible for the reduction in the total
stock of debt and liabilities. As a percentage of GDP, external debt and liabilities
stood at 51.7 percent in end June 2000, declined to 43 percent in end June 2003
and further to 37.8 percent by end March 2004. Similarly, external debt and
liabilities as a percentage of foreign exchange earnings declined from 297.3
percent in 1999-2000 to 181.1 percent in 2002-03 and further to 168.7 percent
by end March 2004. These statistics suggest that Pakistan's external debt burden
has declined substantially over the last four years and is now fast approaching
sustainable levels.

Pre-Payment: Pre-payment of expensive debt has been one of the major
events of the outgoing fiscal year. In the backdrop of a strong build-up in
foreign exchange reserves associated with rising foreign exchange earnings,
Pakistan considered it appropriate to pre-pay some of its expensive debt to
improve the country's debt profile. Accordingly Pakistan pre-paid $ 1.17 billion
worth of expensive loans to the ADB on January 29, 2004. These loans carried
interest rates ranging from 6.3% to 11% with maturities between FY 2005 and
FY 2019. The prepayment exercise clearly indicates the exceptionally strong
external liquidity position of the country.

Euro Bond: The second major event of the outgoing fiscal year has been
a successful return to the international capital markets after a gap of over
half a decade. Pakistan issued $ 500 million five year tenor regulation-S Euro
Bonds due 2009, lead managed by JP Morgan, Deutsche Bank and ABN Amro Bank.
The transaction has attracted strong demand from high quality and diversified
international investors and was four times oversubscribe resulting in the tightest
possible pricing. The success of this transaction reflects a vote of confidence
by the international investor community in Pakistan's economic policies and
reform agenda. The Pakistani Bond was priced at 370 bps above US Treasury (3.046)
to yield 6.75 percent was considered very tight compared with emerging market
peers. The Pakistani bond was priced some 50 bps inside the Philippines, despite
the fact that it is rated 3-notches lower. It also looked tight against Turkey
which is rated one notch above Pakistan. Furthermore, Pakistan's paper was also
tighter when compared with the weighted average spread of 435 bps for emerging
market bonds at the time of the Pakistan's deal. It is encouraging to note that
Pakistan's Paper since February 12, 2004 has been trading in the secondary market
at a premium and as of April 23, 2004 the spread further tightened to 276 bps
- an improvement of 94 bps and a yield to maturity of 6.26 percent from 6.75
percent. As part of a dynamic debt management process, Pakistan transacted an
interest rate swap to lower the interest cost of its bonds. The deal was done
with Standard Chartered Bank @ 3.2275 percent over 6-month LIBOR with protection
against a sharp unexpected rise in interest rates. For the first time in the
country's history, the government undertook such an exercise to reduce the country's
debt burden and as such is building in-house capacity to monitor the global
markets. It would not be out of place to mention here that out of 37 PRGF countries,
Pakistan is the first to demonstrate its ability to raise funds from the international
capital markets. No PRGF country barring Pakistan has ever been successful in
transitioning from IMF resources to funding through the capital markets.

Re-basing of National Accounts: The third major event of the outgoing
fiscal year has been the re-basing of Pakistan's national accounts from 1980-81
to 1999-2000. It is well-known that structural changes do take place in production
as well as in the relative prices of various products in an economy over a period
of time. Besides, on account of continuous developments and innovations a lot
of new products appear in the market and at the same time due to obsolescence
many old products disappear. Larger quality changes also result in the non-comparability
of goods and services between far apart periods. On the demand side, consumption
and investment patterns also experience structural changes. All these factors
demand that the national accounts series be re-based periodically to capture
the structural changes in the economy and depict the true picture of the level
of economic activity.

How often should the base be changed? The international practice of re-basing
national accounts vary considerably across countries with some re-basing after
five years, others after ten years and even others every year. In the Asian
region, the majority of the countries, namely Bangladesh, Hong Kong, China,
India, Nepal, Philippines, Sri Lanka and Thailand undertake their re-basing
exercise every ten years while Macau, Malaysia, Republic of Korea and Singapore
undertake this exercise at a gap of five years. As opposed to international
practices, as well as practices followed in the Asian region, Pakistan delayed
the re-basing of the national accounts for two decades. As such, many structural
changes which took place since 1980-81 until 1999-2000 on the production and
consumption structure of the economy were not captured in the country's national
accounts. The national accounts estimates based on a benchmark of 1980-81 became
antiquated and could not capture the structural changes that occurred during
the last twenty years. As such, a number of economic areas remained either uncovered
or under-reported and accordingly under-estimated the size of the national income.

Taking cognizance of facts narrated above, the Annual Plan Coordination Committee
(APCC) in its meeting in 1997 recommended to re-base the national accounts of
Pakistan to make the GDP and investment figures more realistic. The journey
of the re-basing exercise that began in 1997 culminated in July 2003. During
the period various technical committees were set up, a number of studies were
undertaken and reviewed by the experts inside and outside the country. The National
Accounts Committee in its meeting held in December, 2003 finally approved the
re-basing exercise and accordingly the national accounts were re-based from
1980-81 to 1999-2000. As a result of re-basing, coverage of data has engulfed
a new range of products, enterprises and economic activities such as, courier
services, travel agencies, mobile phones, etc. The coverage of manufacturing
items has been increased from 91 to 128. Accordingly, the size of the overall
GDP in 1999-2000 increased by 19.5 percent, agriculture by 18.5 percent, industries
by 18.0 percent and services by 20.8 percent over the old base. Per capita income
in US dollar term was estimated at $526 for the year 1999-2000 compared to $441
according to the old base. Similarly fixed investment showed an improvement
of 34.3 percent in 1999-2000 mainly due to improved coverage.

Notwithstanding these improvements there are many activities which are still
to be covered in these accounts (especially IT related). Newly emerging activities
taking place at a breathtaking pace pose challenges to the national accounts.
The National Accounts Committee accordingly has decided to regularly re-base
national accounts every five years with the next re-basing exercise beginning
in 2004-05. Timely re-basing will make national accounts more representative
and will depict the true picture of the economy.

Poverty: The discussion so far points to the fact that Pakistan's economy
has gained more strength during the outgoing fiscal year. All its macroeconomic
indicators show marked improvements over last year. The macroeconomic policies
and reform programs pursued over the last five years have not only made the
economy healthier but also set the stage for taking the economy on a higher
growth path. Have such policies and programs improved the living conditions
of the people? Have they reduced poverty and improved social indicators? These
are valid and frequently asked questions. The government believes that the efforts
to strengthen the economy will not be completed unless macroeconomic gains trickle-down
to masses in terms of improved living conditions.

Encouraged by two years of strong growth (5.1% in 2002-03 and 6.4% in 2003-04)
and over Rs. 860 billion of cumulative spending on the social sector and poverty
related programs over the last five years, the government asked the Federal
Bureau of Statistics (FBS) to conduct a sample Survey of Household Consumption
Expenditure (HCES) with a view to gauging the impact of the macroeconomic and
social sectors on the living conditions of the people of Pakistan. The Survey,
covering 5046 rural and urban households (One-third of the sample covered in
PIHS 2000-01) from all the four provinces of Pakistan, was conducted during
April 19, 2004 to May 06,2004. The findings of the Survey are highly encouraging.
Not only has the incidence of poverty shown a significant decline but other
social indicators as well as indicators that represent the living conditions
of the people have shown marked improvements over 2000-01. The Center for Research
on Poverty Reduction and Income Distribution (CRPRID), Planning Commission,
estimated the incidence of poverty using the primary data from the Survey. The
results show that the incidence of the poverty at the national level has declined
by 4.2 percentage points with both urban and rural poverty showing significant
decline in 2004 compared with 2000-01. These results are not surprising as the
Survey shows that there has been a 35 percent increase in the average monthly
consumption expenditure of households. Notwithstanding a decline in the incidence
of poverty, these results should be taken as indicative, as they do not cover
the entire period of 2004. The purpose of this exercise was to gauge the impact
of the government's macroeconomic and social sector policies on the living conditions
of the people. The results simply suggest that the rising trends in poverty
have been arrested and that a reversal has begun to take shape.

Other social indicators and the indicators representing the living conditions
of the people have exhibited significant improvements over 2000-01 as well as
over 1998 Census results. For example, the number of Households living in one
room homes shows a significant decline while that of households living in 2
to 4 rooms houses have increased significantly in 2004 compared with 1998. The
other indicators of living conditions such as major source of drinking water,
the type of toilet used, sanitation, the use of electricity as a source of lighting
and the use of gas as cooking fuel, show a significant improvements over the
last 3 to 6 years. Furthermore, all education related statistics show significant
improvements with the gross enrolment at the primary level increasing from 72
percent to 87 percent - a 15 percentage points increase. These results are highly
encouraging as they show that strong economic growth along with massive spending
on social sector and poverty related programs are now beginning to yield dividends
in terms of declining poverty and improvements in living conditions as well
as in social indicators.

Going Forward

Pakistan has lived through a difficult and testing period. After five years
of hard work the complexion of economy has changed altogether. It is no longer
fragile and its balance of payments is no more vulnerable to external shocks.
Wide-ranging structural reforms, prudent macroeconomic policies, financial discipline
and a consistency and continuity in policies, not seen before, have transformed
Pakistan into a stable and resurgent economy in 2003-04. The stage is now set
for economic growth to accelerate with the private sector expected to play the
leading role in taking the economy on a higher growth trajectory.

Notwithstanding the major successes on the socio-economic front, the progress
made so far is not commensurate with the country's considerable potential. Although
stronger, the economy of Pakistan has many challenges lying ahead. Maintaining
and building on the macroeconomic stability; and sustaining and further accelerating
the growth momentum will be the continuing challenges. Linked with these are
the challenges of job creation, poverty alleviation, minimizing social inequality
and strengthening the country's physical infrastructure.

The stage is now set for growth to accelerate from 6.4 percent this year to
8.0 percent over the next three to four years. An essential foundation for sustaining
this higher growth is the pursuance of sound macroeconomic policies, the key
elements of which include fiscal discipline, appropriate monetary and exchange
rate policies, and prudent debt management. The centrality of economic growth
in addressing the challenges listed above is beyond doubt. Economic growth reduces
poverty because average incomes of the poor typically tend to rise proportionately
with the average income of the population. This result is robust overtime and
across countries and regions. At the macro level, growth implies greater availability
of government resources to improve the quantity and quality of education, health,
water supply, sanitation, and other services. At the micro level, growth creates
employment opportunities, increases income and reduces poverty. To achieve 7-8
percent growth in the next three to four years sectors like agriculture, small
and medium enterprises (SMEs), housing and construction, oil and gas, and information
technology and telecommunications will have to play the central role. Of these,
agriculture, SMEs and housing and construction are expected to generate pro-poor
growth - essential in addressing the income distribution issue. With the country's
population growing at less than 2.0 percent per annum over the next three to
four years, real per capita income is projected to rise by 5.5 - 6.0 percent
per annum. This is the growth in per capita income which will be required to
substantially reduce poverty and unemployment in the country.

Structural change is the essence of development while reform is a dynamic concept.
The country must continue to adjust itself with the changing domestic and external
environment. Over the last five years Pakistan has introduced wide-ranging reforms
in various sectors of the economy. These reforms have started yielding dividends
in terms of higher growth and macroeconomic stability. To achieve 7-8 percent
growth on a sustained basis Pakistan needs to introduce a second-generation
of reforms over the next 4 -5 years. This reform agenda must concentrate on
strengthening institutions, improving the competitiveness of industries, building
a robust financial system and further strengthening of the tax administration.
The current upturn in the economy offers the ideal opportunity to implement
reforms needed to deliver faster growth that is sustainable in the long run.
It is reassuring to see the government's unwavering commitment to pursue the
reform program in the coming years.

Few policies have promoted socio-economic development as successfully as effective
investment in human resources. No nation can progress without a strong human
capital base and investment in this area will be as essential as sound macroeconomic
policies in achieving the desired economic boom. Education is central to overall
human resource development. While basic education develops basic skills related
to literacy and numeracy, higher education especially at the tertiary level
involves specialization in fields of study and occupation relevant to developing
technological capability. Better access of the poor to education and health
care, and a better quality of these services, expand opportunities for them
to improve their own well-being. This calls for allocating adequate government
resources to spending on human capital development. It is reassuring to see
that the government has allocated substantial resources to the social sector
in the PSDP for 2004-05. Most importantly, the allocation for higher education
has increased by 84 percent in 2004-05. This is an important step in the right
direction. Cutting across this agenda is the empowerment of women by removing
barriers to their fuller participation in the development process. Promoting
gender equality is not only an important social goal but is also essential for
the achievement of the broader development goals. Studies find that gender equality
contributes to better education and health outcomes. More recent cross-country
research has found that gender inequalities in education impede economic growth.

Good quality infrastructure is essential for promoting and sustaining strong
growth, necessary to reduce poverty. Pakistan has already moved to a higher
growth trajectory and has targeted a 7-8 percent rate in the next three to four
years. To achieve and sustain this Pakistan needs to invest heavily in infrastructure
-water, power, roads, highways, ports, transport and communications. Heavy investment
in infrastructure is also needed to take advantage of Pakistan's strategic location
in the region for expanding regional cooperation in trade and commerce. In particular,
Pakistan can serve as a bridge between East and West Asia, as well as the entry
port for Afghanistan and the Central Asian Republics. It is in this perspective
that the main theme of this year's Pakistan Development Forum (PDF) was infrastructure
development. Realizing the importance of infrastructure the government has allocated
Rs.87 billion for the fiscal year 2004-05 - 28 percent higher than last year.
Allocation to infrastructure amounts to 59 percent of the total Federal Government
PSDP (Rs.148 billion). This is a step in right direction. Increased investment
in infrastructure alone, however, is not the answer as it must be underpinned
by improvements in governance to ensure effectiveness and sustainability.

Pakistan's economy has gained more strength during the outgoing fiscal year.
All its macro economic indicators show marked improvement over last year. The
macro-economic policies and reforms programmes pursued over the last five years
have not only made the economy healthier but also set the stage for taking the
economy on a higher growth path. The fruits of macro economic gains have also
started trickling down to the poor. A strong economic growth along with massive
spending on social sector and poverty related programmes are now beginning to
yield dividends in terms of declining poverty and improvements in living conditions
as well as in social indicators. Much progress has been made but much remains
to be done. Maintaining the momentum and building on the gains will be both
vital and challenging. Sound macro economic policies, financial discipline,
continuity of policies, political and regional stability will be the key to
sustain the momentum.

EXECUTIVE SUMMARY

Growth and Investment

The resurgent Pakistani economy has shown an impressive growth trajectory for
the second year in a row with real GDP growing by 6.4 percent during the current
fiscal year against 5.1 percent last year. This higher growth is underpinned
by a buoyant industrial sector, which grew by a record 13.1 percent, and a services
sector which grew by 5.2 percent. The agriculture sector has marginally under-paced
real GDP growth by growing at 2.6 percent against 4.1 percent last year. However,
this growth does not truly reflect the contribution of agriculture towards real
GDP growth as higher prices of agricultural produce during the current year
have fueled economic activity. The growth performance was quite impressive and
mainly emanated from the industrial sector reflecting an enhanced productive,
as well as, job creating capacity of the economy. The distinct feature of the
growth patterns had more to do with the relative strength of domestic factors
in different areas rather than the impact of global developments. On the internal
front, fiscal stimulus and monetary easing have supported the growth of domestic
demand. The driving force behind the initial phase of the recovery was the strong
domestic demand for industrial goods and services.
The real GDP at factor cost was originally targeted at 5.3 percent in 2003-04,
with agriculture and manufacturing growing by 4.2 percent and 6.8 percent, respectively.
The real GDP at factor cost grew by 6.4 percent which is supported by 2.6 percent,
13.4 percent and 5.2 percent growth rates in agriculture, manufacturing and
services, respectively. GNP at factor cost exhibited a deceleration in growth
from 7.9 percent in 2002-03 to 5.2 percent in 2003-04 mainly due to a decline
of 30.5 percent in net factor income from abroad.

The agriculture sector grew by 2.6 percent in 2003-04 which is lower than actual
growth of 4.1 percent last year and a target of 4.2 percent. Major crops, accounting
for 34 percent of agricultural value added, grew by 2.8 percent against a 6.9
percent rise in value addition for last year and a target of 5.5 percent for
2003-04. Minor crops, which contribute 12 percent of value addition in agriculture,
grew by 1.7 percent in 2003-04 against a growth target of 3.5 percent and a
slight increase of 0.4 percent last year. The Livestock sub-sector, which accounts
for almost one half of overall value addition in the agricultural sector (49
percent), has witnessed a modest growth of 2.6 percent in 2003-04 against a
target of 3.0 percent and an actual achievement of 2.8 percent last year.

The growth performance of the overall manufacturing sector was spearheaded by
unprecedented growth in the large-scale manufacturing sector which grew by 17.1
percent against the target of 8.8 percent and last year's actual rate of 7.2
percent. The large-scale manufacturing sector, accounting for 68 percent of
overall manufacturing, recorded an impressive and broad based growth and helped
overall manufacturing grow by 13.4 percent, against a target of 7.8 percent
and last year's growth of 6.9 percent. Small-scale manufacturing continued to
grow at an estimated 7.5 percent rate in 2003-04. The Construction sector grew
by 7.9 percent against 3.1 percent last year and a yearly target of 5.4 percent.
The Electricity and gas distribution sector registered a massive increase of
22.5 percent against a decline of 2.6 percent last year and a yearly target
of 5.3 percent. The services sector grew by 5.2 percent against 5.3 percent
last year. The wholesale & retail trade and transport, storage & communication
sub-sectors grew by 8.0 percent and 3.9 percent, respectively against 5.9 percent
and 4.0 percent last year.

The largest contribution to the real GDP growth rate of 6.4 percent came from
the commodity producing sector (3.6 percentage points). Within this sector,
the industrial sector alone contributed 3.0 percentage points with a major share
coming from the manufacturing sector (2.2). The services sector contributed
2.8 percentage points or 43 percent to real GDP growth. As far as the composition
of GDP is concerned, the industrial sector improved its share from 22.6 percent
to 24.5 percent whereas; agriculture declined from 26.2 percent to 23.3 percent
between 1999-2000 and 2003-04. Due to tremendous growth in the recent past the
share of the manufacturing sector has increased from 14.8 percent in 1999-2000
to 17.5 percent in 2003-04.

A sharp acceleration in per capita income was witnessed during the last two
years in dollar terms mainly because of a stable exchange rate and higher real
GDP growth. Against an annual average rate of 1.4 percent in the 1990s, per
capita income grew at an average rate of 13.9 percent per annum during the last
two years (2002-04) and 12.0 percent during 2003-04. The per capita income in
dollar terms increased from $ 526 in 1999-2000 to $652 in 2003-04 - an increase
of 24.0 percent in the last four years.
Total investment picked up sharply to 18.1 percent of GDP in 2003-04 against
16.7 percent last year. Fixed investment also rose sharply to 16.4 percent of
GDP against 14.8 percent last year. Private sector investment also increased
from 11.2 percent to 11.7 percent of GDP. Public sector investment improved
significantly by moving from 3.6 percent of GDP last year to 4.6 percent of
GDP this year. Private sector real fixed investment grew by 7.9 percent as against
an increase of 5.2 percent last year. Public sector investment also accelerated
by growing 40.8 percent in 2003-04. Most importantly, private sector real investment
in large-scale manufacturing registered an extra-ordinary growth of 25.4 percent
in 2003-04 - indicating a sharp rise in private sector confidence on the economy.
Three other sectors registered stellar increases in overall investment including
construction (15%), transport and communication (32.7%) and ownership of dwellings
(25%). National savings as a percentage of GDP remained flat at around 20.0
percent over the last two years mainly on account of a significant improvement
in the current account balance. The national savings rate has increased by 8.3
percentage points of GDP since 1998-99. Domestic savings stood at 17.8 percent
of GDP in 2003-04 against 16.8 percent last year.

Agriculture

Pakistan's economy has undergone considerable diversification over the years,
yet the agricultural sector is still the largest sector. With its present contribution
to GDP at 23.3 percent it accounts for 42.1 percent of the total employed labour
force and is the largest source of foreign exchange earnings by serving as the
base sector for the country's major industries like textile and sugar. It also
contributes to growth by providing raw materials as well as being a market for
industrial products. What happens, therefore, to agriculture is bound to have
a substantial impact on the growth of overall GDP. Over the last one decade
i.e. 1990s(Table 2.1) agriculture grew at an annual average rate of 4.5 percent
per annum but was quite volatile, rising as high as 11.7 percent and declining
by as much as 5.3 percent. The overall performance of agriculture during (2000-01
and 2001-02) was depressed as it was adversely affected by the unprecedented
drought situation. Agricultural growth showed a negative trend for these two
years (See Table 2.1). However during 2002-03, the extent of water shortage
was relatively less and Agriculture grew by 4.1 percent (See Table 2.1). During
2003-04, the wide spread rains and increased snowfall in the catchment areas
contributed to an improvement in the water situation as agriculture grew by
2.6 percent. Slower growth in agricultural during 2003-04 is mainly attributed
to a decline in production of cotton followed by the slower growth in livestock,
the largest contributor to agricultural growth. Furthermore, the shifting of
slaughtering from livestock to manufacturing also slowed livestock growth and
hence agricultural growth. Likewise, a 2 percent growth of fisheries against
the 3.4 percent growth and last year was due to the oil spill of the Tasman
Spirit at the Karachi Port which killed millions of fish and contributed to
the slower growth of agriculture.

As stated earlier, the shortage of water is receding. The canal head withdrawal
in the Kharif 2003 and Rabi 2003-04 seasons increased by 4.96 percent and 26.16
percent, respectively over the Kharif 2002 and Rabi 2002-03. Moreover, the heavy
snowfall on the mountains during Winter 2003 will help fill the country's water
reservoirs and alleviate water shortages to a greater extent for the Kharif
Crops 2004. On the whole, the water situation in the current fiscal year appears
better than last year but still lesser than normal supplies.

The agricultural growth is estimated at 2.6 percent during 2003-04. Major crops,
accounting for 34.2 percent of agriculture value added, grew by 2.8 percent
against 6.9 percent last year. Minor crops, contributing 12.4 percent to agricultural
value added, registered a weaker growth of 1.7 percent against 0.4 percent last
year. Livestock, the largest contributor to overall agriculture value added
(contributing 49.1 percent), grew by 2.6 percent in 2003-04 as against 2.8 percent
in 2002-03. Fisheries accounting for 1.4 percent of agriculture value added
has shown a growth of 2 percent against a growth of 3.4 percent last year. On
the other hand, forestry contributing 2.9 percent to agricultural value added,
grew by 2.9 percent as against growth of 11.1 percent last year.

Amongst the major crops, Wheat production is estimated at 19.767 million tonnes
in 2003-04, as against 19.183 million tonnes last year, showing an increase
of 3 percent. Rice production is estimated at 4.848 million tonnes in 2003-04,
against 4.478 million tonnes last year, an increase of 8.3 percent. Sugarcane
production has increased by 2.6 percent in 2003-04, from 52.056 million tonnes
last year to 53.419 million tonnes in 2003-04. Cotton production has however,
decreased from 10.211 million bales in 2002-03 to 10.048 million bales in 2003-04,
showing a decrease of 1.6 percent. As regards the minor crops, the production
of two major pulses, namely, masoor and mung have increased this year. Production
of masoor has increased by 2.7 percent, followed by Mung (1.7 percent) during
2003-04. The production of mash declined by 13.7 percent. The production of
onion is estimated to increase by 16.1 percent. The production of chillies and
potato decreased by 29.5 percent and 4.7 percent respectively in 2003-04 over
the last year. Agriculture credit disbursement of Rs.47.925 billion during July-March
2003-04, is higher by 27.3 percent, as compared to Rs.37.632 billion over the
corresponding period last year. The fertilizer off-take stood at 2508 thousand
nutrient tonnes in July-March 2003-04 or higher by 9.5 percent, as compared
to 2291 thousand nutrient tonnes for the corresponding period last year.

Manufacturing, Mining and Investment Policies

The overall manufacturing sector continued to maintain its growth momentum during
the current fiscal year. Overall manufacturing recorded an impressive and broad
based growth of 13.4 percent, against a target of 7.8 percent and last year's
growth of 6.9 percent. Large-scale manufacturing, accounting for 67.5 percent
of overall manufacturing, registered an impressive growth of 17.1 percent in
the current fiscal year (2003-04) against a target of 8.8 percent and last year's
achievement of 7.2 percent. This is the highest growth in large-scale manufacturing
ever achieved in the country's history.

Foreign direct investment has witnessed an increase of 9.3 percent in the first
ten months (July-April, 2003-04), whereas, net foreign investment stood at US
$ 629.1 million against US $ 694.5 million last year, showing a decline of 9.4
percent. The decline in foreign private investment is because of the outflow
of $131.3 million in portfolio investment during this period against an outflow
of $1.4 million in the comparable period last year. The rise of 9.3 percent
in Foreign Direct Investment (FDI) is attributed to inflows in three sectors,
namely, mining, quarrying and oil & gas; transport & communication and
finance. The group-wise break-up shows that the financial business has accounted
for the largest slice of FDI at 31.3 percent followed by 22.3 percent in Mining
& Oil and gas exploration. The power sector accounted for a mere 2.0 percent
in FDI. The trade, transport, storage and communication group received 17.7
percent while the chemical, pharmaceutical & fertilizer group accounted
for a 3.1 percent share. Petro-chemicals and refining accounted for 8.0 percent
while construction improved from 1.9 percent to 3.2 percent in total FDI. The
textile industry received 3.5 percent. As far as a country-wise break-up is
concerned, the inflows from Switzerland accounted for 31.9 percent followed
by the United States (27.2 percent), the U.K (12.0 percent), the U.A.E (8.6
percent) and Saudi Arabia (5.0 percent).

The privatization program maintained its pace during 2003-04 and succeeded in
privatizing some high ticket items despite an inhospitable global environment.
By end March 2004, Pakistan had completed or approved 139 transactions with
gross proceeds of Rs 134.4 billion. Of this, an amount of Rs. 33.1 billion was
received during the period July-March, 2003-04 from the sale of the Government's
shareholding in OGDCL, NBP, POL, ARL, DG Khan Cement, SSGC, Thatta Cement, 51%
GOP stake in HBL, Associated Cement, Rohri and 10% shares of Kurram Chemicals

Poverty

Poverty has many dimensions in Pakistan. The poor in Pakistan have not only
low incomes but they also lack access to basic needs such as education, health,
clean drinking water and proper sanitation. Pakistan did not have an official
poverty line until recently. In the absence of any official poverty line various
researchers used their own methods to arrive at different poverty lines to measure
the incidence of poverty. Accordingly, a large number of estimates were available
which made the analysis difficult. The Planning Commission, adopted an official
poverty line based on a caloric norm of 2350 calories per adult equivalence
per day and minimum food requirements. This poverty line approximates to Rs
748.56 per adult per month in 2000-01.

The Federal Bureau of Statistics (FBS) conducted a sample Survey of Household
Consumption Expenditure (HCES) from April 19, to May 6, 2004 with a view to
gauging the impact of socio-economic and macroeconomic policies on the living
conditions of the people of Pakistan. The Survey covered 5046 rural and urban
households from all the four provinces of Pakistan. The findings of the Survey
show that not only the incidence of poverty has significantly declined but other
social indicators also showed a marked improvement since 2000-01. The incidence
of poverty at the national level has declined by 4.2 percentage points with
both urban and rural poverty showing significant decline in 2004 compared with
2001. These results should be taking as indicative as they do not cover the
entire period of 2004. A marked improvement in living conditions has also taken
place. Indicators like the major source of drinking water, the type of toilet
used, and sanitation --- all representing living conditions, show a significant
improvements over the last three years. All education-related statistics also
show significant improvements.

Fiscal Development

Pakistan has made considerable gain on the fiscal side. The overall budget deficit
has been narrowed, the revenue deficit has almost been eliminated and a primary
surplus has been maintained. Resultantly, Public debt is fast moving towards
a sustainable level. Much progress has been made towards fiscal consolidation.
The wide-ranging tax and tariff reforms as well as reforms in the tax administration
have started paying dividends. Tax collection by the Central Board of Revenue
(CBR) has picked up. As a result of prudent fiscal management over the last
5 years, the burden of interest payments on domestic budget has declined sharply,
thereby, releasing resources for development and social sector program.
Total consolidated revenue is estimated at Rs.780.3 billion in 2003-04 as against
Rs.720.8 billion last year, thereby, registering an increase of 8.3 percent.
Total consolidated expenditure is estimated at Rs.957.7 billion which is 6.6
percent higher than last year. Out of the consolidated expenditure, the current
expenditure is estimated at Rs.793.6 billion (82.9 percent of total expenditure)
while public sector development expenditure excluding net lending (Rs.12.1 billion)
(PSDP) amounts to Rs.152.0 billion (15.9 percent of total expenditure). Interest
payments are the single largest item of total as well as current expenditures.
Their share in total expenditure has declined from 29.7 percent in 2001-02 to
23.3 percent in 2002-03 and further to 21.1 per cent in 2003-04. The revenue
deficit, a measure of government dis-saving, has nearly been eliminated from
3.0 percent of GDP in the 1990s. It was 1.7 percent of GDP in 2001-02 and was
reduced to 1.4 percent of GDP in 2002-03 and further to 0.2 percent of GDP in
2003-04. During the last four years, the CBR has collected Rs. 202 billion more
revenue and tax collection has increased by 65.3 percent. Net tax collection
during the first ten months (July-April) of the current fiscal year (2003-04)
stood at Rs 397.2 billion against the target of Rs 388.8 billion, thus surpassing
the target by a fair margin. Against the annual target growth of 10.7 percent,
tax revenue has grown by 12.8 percent in the first ten months of the current
fiscal year.

The public debt to GDP ratio, after reaching 89 percent in 2000-01 mainly on
account of an 18 percent depreciation in exchange rate vis-a-viz the US dollar
has declined substantially to 70 percent as of end March 2004 - a decline of
19 percentage points of GDP in five years. In absolute terms, public debt grew
by 2.8 percent during the first nine months (July-March) of the current fiscal
year. The rupee component of the debt grew by 3.6 percent while the foreign
exchange component rose by 1.9 percent. Public Debt was 317 percent of total
revenue in 1979-80, increased to 505 percent by the end of 1980s and further
to 627 percent by the end of the 1990s. Following the debt reduction strategy
in which raising revenue was one of the key elements, the public debt burden
in relation to total revenue has declined substantially to 488 percent by end
March 2004. Domestic debt is estimated at Rs 2028.4 billion by the end of 2003-04,
against Rs 1879.2 billion in 2002-03 (an increase of Rs 149.2 billion or 7.9%).
However, during the first nine months (July-March) of the current fiscal year,
domestic debt grew by 3.4 percent or Rs.64 billion in absolute terms. There
are indications that domestic debt may remain below the budget estimates. As
percent of GDP, domestic debt is expected to decline from 39 percent to 37 percent
this year. By the end of 2003-04 the share of unfunded debt in domestic debt
is likely to decline to 44.1 percent from 48 percent last year, mainly because
of the rationalization of interest rates in various instruments of the national
savings schemes. The share of floating debt comprised of short-term instruments
has declined sharply from 39 percent to 27 percent over the last five years.
The share of permanent debt (mostly medium to long-run), increased by almost
10 percentage points - rising from 20 percent to 29 percent in the last five
years. The share of short-term debt has declined by almost 11 percentage points
- from 45 percent to 34 percent. Accordingly, the share of long-term debt has
increased by the same margins.
During the last five years, the debt servicing liabilities have declined sharply
from 64 percent of revenue to 35.4 percent of revenue and 54.4 percent to 34.8
percent of current expenditure. Interest payments as a percentage of revenue
have been reduced to one-half (41 percent to 20 percent) over the last five
years. Similarly, their share in total expenditure declined from 30 percent
to 17 percent during the same period. Most importantly as a spercentage of GDP
interest payments declined from 6 percent to 3.0 percent in the last six years.

Money and Credit

Pakistan's banking and financial sector is much stronger today compared to the
recent past and also in comparison to other countries in the Asian Region. The
State Bank of Pakistan now conducts monetary policy through market-based monetary
and credit management, strong corporate governance has been introduced, the
foreign exchange regime has been liberalized and the SBP's capacity for supervision
and prudential regulations has been strengthened. The major challenge for the
country's monetary authority is to build a robust financial system in an environment
of global financial restructuring. Further reforms in the banking and financial
sector over the medium term must include: promoting transparency and accountability,
observance of international standards, strengthening the financial system through
better financial supervision, further privatization of public sector banks as
well as divesting their shares through stock exchanges to retail investors.

The State Bank of Pakistan continued with its easy monetary policy stance during
the current fiscal year with a view to reinforcing the strong growth momentum.
As a result, the interest rate environment remained investment-friendly not
only for businesses but also for the middle class borrowers. Accordingly, the
SBP set the target for monetary expansion to the tune of Rs 230 billion or 11.1
percent higher than last year. The net foreign assets (NFA) of the banking system
were targeted to increase by Rs 130 billion and net domestic assets (NDA) were
set to increase by Rs 100 billion. Within the NDA, credit to the private sector
was projected to expand by Rs 85 billion while Rs 6 billion was earmarked for
public sector enterprises (PSEs). The government sector was expected to remain
fiscally prudent and therefore a meager amount of Rs 15 billion was earmarked
for net budgetary borrowings and a retirement of Rs 6 billion was projected
for commodity operations. The overall monetary expansion target was consistent
with a real GDP growth of 5.3 percent, inflation of 4 percent, and an export
target of $ 12.1 billion for 2003-04.

The monetary expansion during July-March 2003-04 amounted to Rs 254.8 billion
(12.26 percent) compared to an expansion of Rs 211.2 billion (11.99 percent)
in the same period of last year. During July-March 2003-04, the NDA of the banking
system increased by Rs 204.4 billion (13.28 percent) against a decline of Rs
45.7 billion (-2.98 percent) in the corresponding period of last year. The increase
in NDA has resulted mainly due to a massive expansion of private sector credit
which had an unprecedented increase of Rs 244.6 billion in the first nine months
of the current fiscal year against Rs 106.6 billion in the corresponding period
of last year. This upward growth reflects renewed private sector confidence
in the basic macroeconomic fundamentals and is thus a source of accelerating
economic growth in the country. However, the accumulation in NFA was relatively
subdued at Rs 50.4 billion compared to an accumulation of Rs 256.9 billion in
the corresponding period of last year.

Capital Market

The capital markets in Pakistan have witnessed a substantial improvement since
1999-2000 with the spectacular performance of the KSE 100 index, which crossed
5600 points in April 2004, (doubling the January 2003 level) and market capitalization
increasing from Rs 555 billion ($ 9.5 billion) in January 2003 to Rs 1436.0
billion ($ 25.0 billion) in April 2004, (an increase of 159 percent). The KSE
100 index touched an all time high of 5620.7 points on April 19, 2004. A record
turnover of over a billion shares was also seen twice in the year, first on
August 8, 2003 and then on April 15, 2004. The fiscal year 2003-04 has been
a record year for the stock market in Pakistan, with un-precedented growth in
market activity.
The land-mark performance of the stock market during the current fiscal year
can be attributed to a number of positive factors including; a continuation
of pro-growth macro-economic policies; a stable macroeconomic environment; strong
economic growth; a stable exchange rate; a positive privatization process through
the capital markets; a visible improvement in the Pakistan-India relationship;
appropriate reforms initiated by the Securities and Exchange Commission of Pakistan
(SEC); the availability of adequate liquidity in the market; good operating
and financial results from the majority of blue chip companies and the enhancement
of investor confidence, etc.

Over the past few years, the Securities & Exchange Commission of Pakistan
(SEC) has taken measures to restore confidence of both foreign and domestic
investors by endeavoring to ensure that the market functions in a smooth and
transparent manner. The SEC has actively pursued a capital market reform program
geared towards the development of a modern and efficient corporate sector and
capital market, based on sound regulatory principles that provide the impetus
for high economic growth.
During the first ten months of the current fiscal year the KSE share index has
increased by 59.6 percent (from 3402.5 points on June 30, 2003 to 5430.4 points
on April 30, 2004). Similarly market capitalization has increased by 92.4 percent
or from Rs 746.4 billion on June 30, 2003 to Rs 1436.0 billion on April 30,
2004. In terms of US dollars the market capitalization of the Karachi Stock
Exchange was about $ 25.0 billion on April 30, 2004 increasing from $ 6.78 billion
in the end of June 2002 and $ 12.92 billion in the end of June 2003. Out of
the 15 leading stock markets in the world, the KSE share index increased by
61 percent in terms of US dollar during July-April 2003-04, surpassed only by
India. The other 13 leading world stock markets recorded growths ranging from
7.0 percent (China) to 48 percent (Thailand) . It is pertinent to mention here
that unlike the previous year, all the leading stock markets of the world posted
positive growth in the current fiscal year, which may be an encouraging indication
of the world economic recovery.

Inflation

Price stability has always remained high on the policy agenda of the government
because of the cost of inflation and its socio-economic consequences. The Inflation
rate as measured by the change in the Consumer Price Index (CPI), averaged 3.9
percent during the first ten months (July-April) 2003-04 against 3.3 percent
in the same period last year. Food and non-food inflation have been estimated
at 4.9 percent and 3.3 percent against 3.1 percent and 3.4 percent in the same
period of last year. The increase in headline inflation during 2003 -04 is largely
attributable to a significant rise in food price inflation in consumable items
such as wheat, wheat flour, rice irri-6, meat, edible oil and fresh vegetables
due to a supply shortage. However, the core inflation (non-food non-energy)
remained quite subdued owing to the pursuance of prudent fiscal, monetary and
exchange rate policies. The shortage of wheat was the result of below targeted
production, a delay in import and the effect of a 16.7% increase in its support
price .The demand-supply gap in the case of meat occurred on account of the
bird flu virus. The extreme shortage of onion in the market was a consequence
of damage by heavy rains in Sindh. Based on the trend in the prices of these
items, the contribution of food inflation to the overall inflation has increased
to 50% against 38% in the same period last year while a slower increase in non-food
inflation over the last year has been due to a moderate variation in energy
prices.

To contain inflation within limits, the government has taken various measures
such as curtailing government expenditure through stringent fiscal discipline,
supply arrangements through imports and a smooth distribution network for essential
commodities. Throughout the year, the Committee on Kitchen Items now called
the Sensitive Items Price Committee (SIPC) kept a constant watch over prices
and the supply of essential commodities in its weekly meetings.

Trade And Payments

The growth in the external sector of Pakistan gained further momentum during
the outgoing fiscal year 2003-04. This buoyant trend was broad based and can
be attributed to an improved macroeconomic environment within the country on
the one hand and an acceleration in world economic growth on the other. During
July-April 2003-04, exports showed a double digit growth of 13.1 percent to
$ 10,001.0 million against $ 8846.3 million over the same period last year,
thereby achieving 82.7 percent of the export target set for the current fiscal
year. Imports during this period grew by 19.0 percent - rising to $ 12,012.4
million from $ 10,097.8 million for the comparable period last year, causing
the trade balance to expand by $ 759.9 million. The increase in imports was
attributed to higher machinery imports of 22.5 percent, as well as, non-food
non-oil imports which witnessed an exceptionally strong growth rate of 31.7
percent and can be considered a leading indicator of a surge in economic activity.

Notwithstanding a slow-down in the flow of remittances, the current account
balance (excluding official transfers) during July - March 2003-04, remained
in surplus for the 3rd year in a row at $ 1369 million against $ 2706 million
for the same period last year. The surplus with official transfers was higher
at $ 1859 million but lower compared to $ 3507 million over the same period
last year. The net out-flow under the services account surged to $ 2260 million
and private transfers in this period were up by $ 62 million. The foreign exchange
reserves crossed $ 12.5 billion and were sufficient to finance about one year
of imports giving much needed stability to the exchange rate. Thus, the Pak-rupee
versus the US dollar appreciated nominally by 0.5 percent from the beginning
of the current fiscal year until April, 2004.

External Debt And Liabilities

Over the last four years and in particular with the establishment of the Debt
Office in the Ministry of Finance, a concerted effort has been made to achieve
debt sustainability in the country. As a result Pakistan's external debt and
liabilities have declined by $ 2.072 billion - down from $ 37.918 billion in
1999-2000 to $ 35.846 billion as of end March, 2004. The debt and liabilities,
when adjusted for SBP liquid reserves, have been reduced from $ 36.929 billion
(end June, 2000) to $ 24.845 billion as of end March, 2004 - a reduction of
$ 12.084 billion. However, external debt and liabilities during July - March,
2003-04 increased by about one percent over the level of end June, 2003 mainly
on account of currency revaluation. Likewise the amount paid on account of debt
servicing of external debt and liabilities has declined to $ 4059 million (end
March, 2004) from $ 4349 million in end June, 2003. Similarly the rollover amount
of debt servicing also declined from $ 1908 million to $ 1100 million.

Pakistan has witnessed two extraordinary events during the current year. First,
on January 29, 2004 Pakistan pre-paid $ 1.17 billion of high cost external debt
to the Asian Development Bank. The second major event was the strategic re-entry
of Pakistan into the international capital markets through the floatation of
$ 500 million Eurobond on February 12, 2004 at a fixed rate coupon of 6.75 percent.
The order book swelled to $ 2.0 billion (a four times over-subscription) and
hence the tightest possible pricing was achieved for the bond. This reflects
a vote of confidence by the international investor community on Pakistan's economic
policies and reform agenda. The re-entry into the international capital markets
will help prepare Pakistan for a smooth graduation from the IMF program and
thus reduce its dependence on multilateral institutions. As part of a dynamic
debt management process, Pakistan transacted an interest rate swap to lower
the interest cost of its Eurobond with Standard Chartered Bank at a rate of
3.2275 percent over 6-month LIBOR. This transaction should thus lower the cost
of borrowing of the Eurobond issue by as much as two percentage points given
a tame rate outlook.

Education

The education is becoming one of the defining enterprises of the 21st century
with the emergence of globalization and increasing global competition. In this
fast changing and competitive world, education and technology are the master
keys for respectable survival and progress of Pakistan. Pakistan needs to respond
positively to emerging opportunities and challenges of globalization. Education
is a key to change and progress.

Total number of Public and Private Institutions at primary level is 156,100,
middle level is 28716 and at high school level is 16059 in the financial year
2003-04. Over the last five years, primary, middle and high school institutions
increased by 5.7 percent, 12.7 percent and 8.6 percent respectively. Similarly,
total enrolment at public and private institutions, as documented in table 11.2,
registered an increase of 4.7 percent, 7.3 percent, and 6.0 percent in primary,
middle and high school levels, respectively. It is encouraging to note that
enrolment of girls child increased by 6.4 percent while boys enrolment increased
by 3.5 percent over the last four years.

Literacy rate for both sexes is estimated at 54.0 percent in the current year.
Literacy rate for male and female are estimated at 66.25 percent and 41.75 percent
in the current year respectively and up from 56.48 percent and 32.59 percent
in 1998. Under the Education Sector Reforms, the National Literacy Campaign
envisages making 13.5 million people literate to enhance the literacy rate to
60% by 2006.
The Higher Education Commission (HEC) was established in September 2002 with
a view to guiding higher education policy and assisting universities and degree
awarding institutes in the pursuit of quality education at the seat of higher
learning, both public and private. Its objective is to work with the academic
community for qualitative and quantitative improvement of higher education and
to aid in the socio-economic development of Pakistan.

We should stand committed to quality improvement in public service delivery
at all levels in which civil society and private sector are our valuable partners
so that we can move towards becoming a knowledge-based society spurring human
development and economic growth. Private and public sector hand in hand can
make great difference.

Health & Nutrition

The government attaches a very high priority to the improvement of health facilities
so as to translate the economic success into social benefits. In Pakistan, the
coverage of health facilities has improved over the years. The existing network
of medical services consists of 906 hospitals, 4554 dispensaries, 5290 basic
health units (BHUs), 552 rural health centres (RHCs) and the availability of
98684 hospital beds. Besides, there are 108062 doctors, 5530 dentists and 46331
nurses in the country. During the calendar year 2003, the population medical
facilities ratio in terms of doctors works out to be 1404 persons per doctor,
27414 persons per dentist, 3296 persons per nurse and the availability of one
hospital bed for 1536 persons.
The total outlay on health during 2003-04 is estimated at Rs.32.8 billion which
shows an increase of 13.8 percent over last year and works out to 0.8 percent
of GNP. The new health facilities added to the overall health services system
during 2003-04, include the construction of 30 new facilities (25 BHUs and 5
RHCs), up-gradation of 35 existing facilities (25 BHUs and 10 RHCs), addition
of 1600 hospital beds and training of 3500 doctors, 200 dentists, 2000 nurses
and 4500 paramedics besides the recruitment of 17000 LHVs. To control the common
diseases and to alleviate their pain and suffering, various health programmes
like TB, Malaria and AIDS Control Programmes were also carried out.

The caloric intake per person has been estimated as 2529 per day in 2003-04
showing an increase of 2.6 percent over the previous year and per capita protein
availability has increased from 64.3 grams last year to 65.8 grams in the 2003-04.

Population & Labour Force And Employment

Pakistan's population in mid-2004 is estimated at 148.72 million - 1.9 percent
higher than last year. Pakistan's population has been growing at a decelerating
pace. On the basis of the estimated population of 148.72 million and the participation
rate of 29.61 percent, as per the Labour Force Survey 2001-02, the total labour
force is estimated at 45.05 million. Of this, 30.19 million or 67.03 percent
is in the rural areas and 14.85 million or 32.97 percent is in the urban areas.

A comparison of rural and urban participation rates reveals that the labour
force participation rates are higher in rural areas as Pakistan's economy is
mainly agrarian and agriculture is a family occupation there. The female labour
force participation rate is far less compared to the male participation rate
and as such their participation in economic activities is also low. The total
number of the employed labour force in 2004 is estimated at 41.32 million compared
to 40.48 million in 2003. The total number of employed persons in urban areas
has increased from 13.12 million in 2003 to 13.4 million in 2004. Similarly,
rural employment increased from 27.36 million in 2003 to 27.91 million in 2004.

The agriculture sector absorbs 17.4 million or 42.1 percent of the total workforce
in 2004. This sector employed 18.09 million people in 2000 with a relative share
of 48.4 percent. The share of the employed labour force in the community and
social services sector, which was 14.2 percent in 2000, has increased in 15.5
percent in 2004. The share of the trade sector has also increased from 13.5
percent in 2000 to 14.8 percent while that of the manufacturing sector has increased
from 11.6 percent to 13.8 percent in the same period. The construction and transport
sectors accounted for 6.1 percent and 5.9 percent workforce respectively in
2004. About 3.72 million people in the labour force were estimated to be unemployed
in 2004 compared to 3.65 million in 2003. The unemployment has increased from
7.82 percent in 2000 to 8.27 percent in 2004.

Transport And Communications

A good quality transport and communication system is an integral part of a strong
infrastructure. Infrastructure contributes to promoting growth, creating employment
opportunities, and hence reducing poverty. There are large gaps in the availability
and quality of the key infrastructure services in developing countries, particularly
in low income developing countries. Within countries, coverage rates are lower
in rural areas, where the majority of the population lives. But coverage in
other areas is also under pressure from rapid rural-to-urban migration in many
countries. Narrowing gaps in access and quality will require sizeable increases
in investment and associated spending on operation and maintenance.
As of March 2004, the total length of roads in the country was 255,856 km, including
157,975 of high type (62 percent) and 97,881 km of low type roads (38 percent).
During the outgoing fiscal year, the length of high type roads has increased
by 3.1 percent over the last year but the length of low type roads has declined
by 1.1 percent. The total number of motor vehicles on road stood at 5 million.
Pakistan Railways major assets include 592 locomotives, 1882 passenger coaches
and 22,052 freight wagons. During the first nine months of the current fiscal
year, it carried 52.9 million passengers and 4.6 million tons freight with gross
earnings of Rs. 10.5 billion.

The Pakistan International Airlines covers 38 international destinations and
24 domestic stations, servicing almost all parts of the country. Its fleet consists
of 47 aircrafts of various types. Beside this, two private airlines are also
operating on local and international routes. As a part of the fleet replacement
plan, PIA received three wide body aircrafts 777-200ER upto March 2004. The
country has two major seaports namely, Karachi Sea Port and Port Qasim. The
country's biggest seaport of Karachi has handled 20,500 thousand tons of cargo
during July-March 2003-04, compared with 20,011 thousand tons of cargo during
the corresponding period last year, which is higher by 2.4 percent. Port Qasim
has handled 11.2 million tones of cargo during July-March 2003-04. The Gwadar
Port is being built with Chinese assistance and its first phase will be completed
by March 2005.

The government is also according higher priority to the Information Technology
(IT) sector. For promotion of Information Technology, 1812 cities/towns/villages
have been provided Internet facilities, as of March 2004 compared to 1350 cities/towns/
villages in June 2003 showing an increase of 34 percent. Total telephone lines
installed by March 2004 were 5.0 million against 4.9 million up to June 2003
last year, showing an increase of 2.0 percent. Similarly with the launching
of the prepaid connection of
U-Fone, mobile phones have reached 3.7 million in number as of March 2004 against
2.4 million up to June, 2003 showing a growth of 54.2 percent. There are 0.191
million PCOs and 288 telegraph offices working in the country.

Energy

In Pakistan, primary commercial energy supplies increased by 4.0 percent during
2002-03 compared to 1.8 percent in the pervious year reaching 47.1 million tonnes
of oil equivalent mainly due to an increase in natural gas, hydel power and
coal at rates of 1.4, 0.8 and 0.3 million tonnes respectively. However, the
supply of oil decreased by 0.4 million tonnes of oil equivalent in 2002-03 due
to a decline in the import of furnace and high speed diesel oil. The cement
industry has started using coal, both local, as well as, imported to replace
natural gas and furnace oil. There is a need to create an environment for the
improvement of the energy sector in Pakistan in order to introduce competition,
so that energy can be made accessible, affordable, and reliable to the people.

During July-March 2003-04 the production of crude oil per day has decreased
to 62,139 barrels, from 64,905 barrels per day during the same period of last
year, showing decline of 4 percent. The overall production of crude oil has
also decreased to 17.1 million barrels during July-March, 2003-04, from 17.8
million barrels during the same period last year. Sector-wise consumption of
petroleum products reveals that on average, the transport sector consumed 47.6
percent of the petroleum products followed by the power sector (31.9 %), industry
(12.2 %), households (3.9 %), other government (2.5 %), and agriculture (1.8
%) over the last thirteen years i.e. 1990-91 to 2002-03.

The production of natural gas during July-March, 2003-04 was 3,173 million cubic
feet per day against 2,648 mmcfd during the same period last year, showing an
increase of 525 mmcfd or almost 20 percent. However, the overall production
of gas has increased to 882,684 million cubic feet during July-March 2003-04
compared to 724,602 million cubic feet during the same period last year. On
average the power sector consumed 34.8 percent of the gas, followed by fertilizer
(23.9 %), industrial (18.9 %), household (17.7%), commercial sector (2.9 %),
and cement (1.6 %) over the last thirteen years, i.e. 1990-91 to 2002-03.
The total installed capacity of electricity (hydel and thermal) has shown a
significant increase of 9.6 percent over the first nine months of the current
fiscal year and 19,478 MW. During July-March, 2003-04, 56,641 Gwh electricity
has been generated against 54,426 Gwh in the same period last year, showing
an increase of 4.1 percent. The total installed capacity of WAPDA stood at 11,436
MW during July-March 2003-04. Of which, hydel accounts for 58.6 percent or 6,696
MW, thermal accounts for 41.4 percent or 4,740 MW. The number of villages electrified
has increased to 78,820 during July-March, 2003-04 from 73,807 in 2002-03 showing
an increase of 6.8 percent.

More than 1,300 licences for the installation of CNG stations have been issued
of which 500 CNG (38.5 %) stations have been actually established in different
parts of the country compared to 362 in 2002-03, an increase of 38 percent upto
March 2004. 450,000 vehicles have also been converted to CNG, compared to 300,000
vehicles last year (an increase of 50 percent)

Environment And Housing

I. Environment

The environmental crisis in the world has been caused by the over exploitation
of its renewable as well as non-renewable resources. Developing nations are
especially affected due to institutional failures as well as a paucity of resources.
Of these, the former is particularly critical because with an adequate institutional
network and its synergistic functioning, it is possible to make optimum use
of whatever resources are available. Even where communities are aware of the
dire consequences of environmental pollution and resource degradation, they
may be unable to take adequate remedial action due to lack of options, knowledge,
social mobilization and institutional support.

During the last decade, Pakistan has made diligent progress in the institutional
strengthening and capacity building of policy and planning institutions, environmental
awareness, and the promulgation of environmental legislation, National Environment
Quality Standards (NEQS), and the establishment of environmental tribunals.
The energy sector introduced lead-free petrol and since July 2002, all refineries
in the country are supplying lead-free petrol and promoting clean fuels including
CNG.

Air pollution levels in Pakistan's most populated cities are among the highest
in the world and climbing, causing serious health issues. The levels of ambient
particulates - smoke particles and dust, which cause respiratory disease - are
generally twice the world average and more than five times as high as in industrial
countries and Latin America. The Government offered numerous incentives to private
investors to invest in CNG over the last decade with the result that today Pakistan
is the largest user of CNG in Asia. Currently, 500 CNG stations are providing
CNG to more than 450,000 vehicles all over the country. This has helped a lot
in lowering the pollution load in many urban centers. After the successful CNG
programme for petrol replacement, the government is now embarking upon a programme
to replace the more polluting diesel fuel in the road transport sector. The
government has planned to offer incentives to investors to introduce CNG buses
in the major cities of the country.

The combustion of coal is another main contributor to air pollution. The three
main uses of coal are power, brick-kilns and for domestic purposes. However,
since 1998-99, coal use has been decreasing gradually in all the three sectors
and is being replaced by natural gas. During July - March 2003-04, 3173 million
cubic feet of natural gas was supplied per day as against 2648 million cubic
feet per day during the same period last year, showing an increase of almost
20 percent.

During the fiscal year 2003-04, major projects under implementation with the
environmental sector were Institutional Strengthening, Capacity Building, Mass
Awareness, Forestry and Watershed Management, Fuel Efficiency in Road Transport
and Industrial Efficiency and Environmental Management Sector Development Program.

II. Housing Sector

Globally, the construction and housing industry account for 10-12% of GDP and
7% of employment. The housing and construction industry has enormous forward
and backward linkages and according to a modest estimate, 35-40 industries move
in tandem with this sector. Therefore, the industry has the greatest employment
generation potential (Employment Elasticity is 0.8). It can also create low-paid
jobs of Chowkidars and ordinary construction workers to medium-paid jobs of
Masons, Carpenters, Electricians, Painters, Plumber etc; and highly paid jobs
for architects, engineers, designers, decorators, contractors etc. It is for
this reason that the government has identified this sector as one of the five
major drivers of growth. As is reflected in the National Housing Policy-2001
and the Prime Minister's Initiatives under the "Housing for All" program.

Pakistan has over 19.3 million Housing units in the country. About 24.8 million
Housing units for a population of 148.7 million people are required. Hence,
a shortfall of 5.5 million homes is estimated as of end June 2004. On an annual
basis, we need 570,000 units against the actual supply of 300,000. Thus, there
is an annual shortfall of 270,000 units and the backlog is rising. A number
of measures have been taken by the Government for reviving the housing and construction
sector, which has been declared a priority industry. The government has also
announced various incentives in the National Housing Policy for providing affordable
housing for the poor. A rapid growth in housing finance will significantly contribute
to the economy in the form of additional employment and support a variety of
allied industries.

These measures include; the improvement in the availability of housing finance
by encouraging commercial banks to extend housing loans, the reduction in interest
rates from 17-18% to 7.5 to 8.5%, streamlining of the legal frame work for loan
recovery of financial institutions, and the enhancement of bank exposure to
housing finance from 5% to 10% of net advances. The maximum housing loans per
party limit has been increased from Rs.5 million to Rs.10.0 million and the
maximum debt-equity increased from 70:30 to 85:15. The maximum loan tenure for
housing finance has been increased from 15 to 20 years and the maximum limit
of lending for HBFC has been increased from Rs.20 million to Rs.50 million.

In the fiscal area, the measures taken include the enhancement of Tax credits
on borrowing under housing loans from financial institutions from Rs.100,000/-
or 25% of the income of the mortgager, to Rs.500,000/- or 40% of the income
of the mortgager, whichever is less. The limit of property income for withholding
tax has been raised from Rs.100,000/- to Rs.200,000/-. The rate of withholding
tax on property income has been reduced from 7.5% to 5%. CED on wires and cables
has been withdrawn and excise duty on cement has been reduced by 25% to lessen
the cost of construction.